SMEs and Globalization

SME Definition

There is no single uniform definition of SMEs applicable across the board in Pakistan. Different departments and organizations define SMEs in accordance with their functional ease rather than market situation. For example, the SME Bank defines an SME as that which has total assets up to Rs. 20 million whereas a medium scale enterprise may have total assets equaling Rs. 100 million. On the other hand, SMEDA defines SMEs according to the dual criterion of productive assets and number of employees. This disparity in definitions adopted by various SME support departments.

Various Institutional Definitions of SMEs in Pakistan are:
Small and Medium Enterprise Development Authority (SMEDA)

According to SMEDA an entity who has 36-99 Employees or Productive assets of Rs. 20-40 million.

SME Bank

An Entity having total Assets of Rs. 20 million.

Federal Bureau of Statistics

An entity which holds less than 10 employees and Total Assets of Rs. 100 million

State Bank of Pakistan

An entity, ideally not being a public limited company, which does not employee more than 250 persons (manufacturing) and 50 persons (trade / services) and also fulfills one of the following criteria:
(i) A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million.
(ii) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million.
(iii) Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

Punjab Industries Department

An entity with the Fixed assets of Rs. 10 million excluding cost of land.

Sindh Industries Department

Entity engaged in handicrafts or manufacturing of consumer or producer goods with fixed capital investment up to Rs.10 million including land & building.

Punjab Small Industries Corporation

An entity having fixed investment up to Rs. 20 million excluding land and building

SMEs contribute to economic development in multiple ways, creating employment for expanding rural and urban workforce and providing much needed flexibility and innovation in the economy as a whole. Their ability to diversify economic activity makes a significant contribution to exports and alleviates poverty. Such benefits, however, have not been fully realized in Pakistan yet.

SMEs play a vital role in the growth & development of leading economies of the world such as USA, Japan, South Korea, Thailand, Malaysia and many others. SMEs in these countries make major contributions to employment creation as well as GDP growth. That’s why the major focus of these developed and developing country’s governments are on the SMEs. A number of developed countries of the world depend on their small and medium for technological innovation, revenue growth and employment generation.

SMEs constitute more than 90 per cent of businesses in Pakistan, all of which function within the private sector and mostly operate in the undocumented informal part of the economy. They represent a significant component of Pakistan’s economy in terms of both value addition and employment generation. As they predominantly provide employment to lower income groups, they are also considered an important vehicle for poverty reduction.

SMEs, in particular, play a key role in the manufacturing sector by providing 80 per cent of the total employment, contributing over 30 per cent to GDP, and generating one-fourth of the sector’s export earnings.

1- Contribution of SMEs in Manufacturing Sector

Employment GDP Value Added Export Earnings
80% 30% 30% 25%
Source: Economic Survey of Pakistan, 2004-05

Approximately, half of the total SMEs activity is concentrated in five sub-sectors; grain milling, cotton weaving, wood and furniture, metal products and art silk. For the past three decades, the fastest-growing export industries have been dominated by the SMEs.

Sub-sectors Percentage Share in exports

Cotton Weaving 13%
Other Textiles 6%
Metal Products 7%
Carpets 4%
Art Silk 5%
Grain Milling 16%
Jewelry 4%
Wood & Furniture 10%
Others 35%

Source: Economic Survey of Pakistan, 2004-05

There are a number of factors responsible for the importance of SMEs in Pakistan. First, SMEs foster an entrepreneurial culture and provide resilience in the economy. Second, SMEs dominate the fastest growing export sub-sectors, such as cotton weaving and surgical instruments. Third, they are an important vehicle for poverty reduction. Finally, SMEs are significant contributors to the Pakistani economy in terms of both value-addition (30 percent) and employment (80 percent)

For instance, the Ministry of Labor, Government of Pakistan, estimates that between 2003-2008, there will be an addition of 16 million persons in the labor force. To put these new entrants to work would take an investment of Rs. 5.2 trillion in large scale sector while only Rs. 8 billion in the small/micro scale sector. In the medium scale sector the cost would be Rs. 0.8 trillion.

3- Investment Estimates for Job Creation

Investment Required to Create Jobs

(Large Scale Sector)

Investment required to Create Jobs (small and medium enterprises)

Source: SMEDA estimates based on approximated number of future entrants in the job market.

4- Distribution of SME in GDP by Sector

Source: SMEDA

There is considerable evidence to show that sectors dominated by SMEs are better able to exploit ‘dynamic’ gains through widely dispersed learning, both geographically and in terms of the number of firms. Sectors dominated by SMEs tend to generate higher levels of competition and mobility, which in turn forces higher levels of learning among firms. This occurs through two mechanisms. First, the discipline imposed by competition forces firms to innovate at a faster rate in order to survive. Second, liberal entry into the population of firms allows greater experimentation, which increases the probability of a firm developing or adapting better organizational and technological traits.

Of the many impacts of globalization, the following two are having particular interest to SMEs:

1) Acceleration in the pace of growth of world trade
2) High levels of competition in the global market place

1- Acceleration in the pace of growth of world trade:

With the coming of WTO regime, SMEs have to manage growth and change in an environment where the pace, patterns and organization of production will need to be transformed fundamentally. Trade liberalization at the global and regional levels, the new Information & Communication Technology tools have combined to create rich opportunities as well as formidable challenges to all interdependent countries and enterprises.

2- High levels of competition in the global market place:

Competition has become increasingly fierce among the global and regional economies and enterprises. Consumer preferences and market standards have become more sophisticated and exacting. Competitive advantage is now determined by several non-price parameters such as quality, health and safety, social equity in employment and production and ecological compatibility of products and processes.

Ø High transaction costs associated with the development of capacities and capabilities to manage and generate technological change. Due to these high costs, enterprises in developing countries tend to be ineffective in exploit available technology options, as well as in utilizing the transferred technologies.

Ø Inability to acquire sophisticated testing equipment and R&D facilities.

Ø Lack of skills/experience to operate the high technological machinery.

Ø Insufficient knowledge of possibilities for technological co-operation.

Ø Inadequate knowledge and resource base for searching for partners and sources of new technology.

Ø SME’s often lack information on target market quality requirements and regulations as well as knowledge to achieve the quality levels.

Ø Absence of appropriate testing and other quality control or measuring equipment and related infrastructure as common facility centers.

Development of small businesses has long been debated at public and private forums in Pakistan, but until recently the motivation behind these efforts was more socio-political than economic. The main focus of economic policies, budgetary measures and regulatory regime was large scale industry. As a result, structural imbalances were created in Pakistan’s business environment, which got skewed unhealthily towards promoting large scale industry.

In 1998, the government of former Prime Minister Nawaz Sharif, becoming cognizant of SMEs’ economic importance, formed Small & Medium Enterprise Development Authority (SMEDA) as the flagship organization meant to provide support to SMEs in Pakistan through:
1. the creation of a conducive and enabling regulatory environment;
2. development of industrial clusters;
3. and the provision of Business Development Services to SMEs in all areas of business management.

1- Single uniform definition for SMEs

It is extremely important to have a single uniform definition for SMEs in order for the support institutions to implement assistance programs for all enterprises in lieu of resource constraints. The issue of SME definition therefore requires careful consideration, taking into account the position of SMEs in the national economy, the level of economic development, industrial structure, level of technology, the character of labor market and more importantly, the value which society attributes to the concept of public policy. Until there is an acceptable definition of SMEs, applicable across all institutions, their development will remain subject to the whims of the organizations they have to deal with.

2- Coordination & Institutional Support
Given the limitation of SMEs in terms of technical inadequacy, non-availability of cheap raw materials, inefficient production techniques and limited access to profitable markets, coordinated business support programs are a cornerstone of any system which strives for sustainability. This also maximizes the potential for cooperation with private sector organizations to minimize distortions in the market economy.
The role of government as a facilitator of business and its interaction with business support institutions is imperative for the establishment of a mutually beneficial relationship for the growth of the sector. In Pakistan there are a number of ministries and departments that are concerned with SME development. At present the situation is marred with lack of coordination and regular information exchange mechanism among institutions constrains their collective ability to deliver.
Ministry of Industries and Production, through SMEDA, is primarily responsible for the coordination of development efforts for SMEs.

The Government of Pakistan has developed a number of strategies for socio-economic development of the country. Most of the activities mentioned above include assistance in the creation of a network of institutions stimulating the growth of SMEs. These institutions cover Regional Development Agencies, Business Support Centres, Chambers of Commerce and a number of other organizations which are established as an initiative of local communities. For coordination among all these institutions, an SME Task Force has been established in the Ministry of Industry & Production with SMEDA as its secretariat. But greater coordination and similarity of approach is needed.

3- Simple business registration process

Establish simple business registration to facilitate entry into the formal economy it has been proposed to assist the Government in undertaking measures of awareness building and to support the development of simple, cheap, and easy registration processes and business friendly one-stop-shop arrangements to improve the coverage of registration.

4- Improve quality standards

Improve quality standards for industry and labor. This can be achieved by reducing the abuse of power by inspectors through a non-invasive inspection policy and promotion of self-inspection by the private sector.

5- Enhance export readiness of SMEs

Enhance export readiness of SMEs through enabling policy measures and an action plan. For this purpose, effective collaboration among SMEDA, Export Promotion Bureau (EPB), and Pakistan Standard and Quality Control Authority (PSQCA) has been proposed for the development of a policy and action plan to enhance export readiness of SMEs with the help of these institutions.

6- Improving SMEs’ Access to Finance

Following steps are required for increasing their access to formal financial sources:

Establishment of support infrastructure to improve coverage of credit information to facilitate quick and reliable loan processing mechanismImprove access to risk capital by revising tax regulations for risk capital investorsDeepen supply and marketing channel financing to small clients of corporate entities through partial credit guarantee. Support commercial banks to develop SME dedicated financing capabilities, equity investment products and to invest in capacity building of their staff to deal with the peculiarities of the SME sector.

SMEDA has so far undertaken significant advocacy work, awareness-building activities, and prepared a number of important sector strategies, publications and feasibility studies for SMEs. However, the qualitative fruits of these efforts are yet to reach the SMEs. Thus in order to achieve a significant outreach to the SMEs and fulfill its mandate more effectively, SMEDA needs to be empowered in terms of resources and its autonomous status needs to re-established as the apex body for SME growth stimulation.

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